Enterprise Products Partners LP, GulfTerra Energy Partners LP, and El Paso Corp. agreed to merge Enterprise and GulfTerra to form the second largest US publicly traded master limited partnership after Kinder Morgan Energy Partners LP.
Upon completion of a complicated, three-step series of transactions between the two partnerships and El Paso, GulfTerra will become an Enterprise subsidiary.
The overall merger is expected to close by second half 2004.
El Paso expects to raise $1 billion from the sale of its 50% stake in GulfTerra to Enterprise. All three companies are based in Houston.
Separately, El Paso revealed a long-range plan that involves the sale of more than $3 billion in assets to help the company reduce its debt to $15 billion by Dec. 31, 2005; as of Sept. 30, El Paso held $22 billion in debt.
In other recent midstream news:
- Norway's Norsk Hydro ASA and German gas transportation and supply company Wingas GMBH set up a 50:50 joint venture to market natural gas in the UK.
- Statoil ASA and Østfold Energi AS established a natural gas marketing and distribution company, Naturgass Øst AS, to serve Østfold County in southeastern Norway.
- MarkWest Energy Partners LP has acquired American Central Western Oklahoma Gas Co. LLC's Foss Lake gas gathering system and Arapaho gas processing assets for $38 million.
In recent upstream news:
- At presstime last week, OAO Yukos reported it would hold a press conference Dec. 17 in Moscow during which time the company was expected to verify prevalent speculations that it will unwind a planned friendly takeover of fellow Russian firm OAO Sibneft, according to press reports.
- ChevronTexaco Corp. plans to evaluate opportunities to divest certain production and midstream assets in western Canada. This is in addition to ChevronTexaco's previously announced plans to sell its interests in nonstrategic US properties.
- EnCana Corp., Calgary, announced a $90 million budget for its 2004 coalbed methane (CBM) development on its 700,000 acres of 100% owned lands in southern Alberta.
Enterprise, GulfTerra
Affiliates of Enterprise Products Co., a private company, and El Paso each will own 50% interest of the new combined general partner.
The combined partnership will be named Enterprise Products Partners and will have a $13 billion enterprise value.
O.S. Andras, Enterprise president and CEO, called the transaction a "merger of equals to form one of the premier midstream energy companies."
Robert Phillips, GulfTerra Energy Partners chairman and CEO, said the merger will benefit both GulfTerra and Enterprise shareholders.
Following completion of the merger, the management of the general partner of Enterprise will be Dan L. Duncan, chairman; Andras, vice-chairman and CEO; and Phillips, president and chief operating officer.
El Paso is selling its controlling interest in GulfTerra, a gathering system, to Enterprise.
Previously, GulfTerra was known as El Paso Energy Partners LP (OGJ Online, May 7, 2003).
Doug Foshee, El Paso president and CEO, said, "Through our ownership of 50% of the Enterprise general partner and 14 million common units, El Paso's shareholders will participate in significant onshore and offshore opportunities. In addition, the $1 billion of net proceeds from this transaction will accelerate El Paso's debt reduction program."
The new resulting MLP will own more than 30,000 miles of pipeline, including more than 17,000 miles of natural gas pipelines, 13,000 miles of natural gas liquid pipelines, and 340 miles of large-capacity crude oil pipelines in the Gulf of Mexico.
Concurrent with the merger's closing, Enterprise will acquire nine South Texas natural gas processing plants from El Paso for $150 million.
Analysts' comments
Standard & Poor's Rating Service in New York lowered its credit rating on El Paso to B from B+, noting that the company's outlook remains negative because of the company's high level of debt.
S&P affirmed its BB+ rating on GulfTerra, however, and kept the company on credit watch status with negative implications.
"The proposed merger of GulfTerra and Enterprise would be complementary in several ways, including the fit of the operations and the improved corporate governance and management of the new company," said S&P analyst Todd Shipman.
Shipman said, ultimate credit ratings on the merged entity will depend on a complete analysis when the merger nears completion.
Deal details
The overall merger includes three transactions. An affiliate of Enterprise's operating partnership will acquire a 50%, limited-voting interest in GulfTerra's general partner, GulfTerra Energy Co. LLC, for $425 million.
Before the initial transaction closes, El Paso will reacquire the 9.9% ownership interest in GulfTerra's general partner held by Goldman Sachs & Co.
This will result in an El Paso Corp. affiliate and an Enterprise affiliate each owning 50% of the general partner.
An El Paso affiliate will continue to serve as the managing member of GulfTerra's general partner, and the Enterprise affiliate member's rights will be limited to protective consent rights on certain transactions.
In a second transaction immediately before the merger, El Paso will contribute its 50% ownership interest in the GulfTerra general partner to Enterprise Products GP LLC, the general partner of Enterprise.
In exchange, El Paso will receive a 50% interest in Enterprise's general partner.
The remaining 50% of the Enterprise general partner will continue to be owned by affiliates of Enterprise Products Co.
The Enterprise general partner then will contribute this 50% ownership interest in the GulfTerra general partner to Enterprise for no consideration.
In addition, Enterprise will pay El Paso $500 million for 13.8 million units, which include 2.9 million GulfTerra common units and all of the GulfTerra Series C units that it owns.
In the final transaction, GulfTerra will merge with a wholly owned subsidiary of Enterprise, with GulfTerra surviving the merger as a wholly owned subsidiary of Enterprise.
Terms of the merger agreement call for GulfTerra's shareholders to receive 1.81 Enterprise common units for each GulfTerra common unit, which represents a premium of 2.2% based on the Dec. 12 closing prices of their respective common units.
The remaining 7.5 million GulfTerra common units owned by El Paso will be exchanged for Enterprise common units based on a 1.81:1 exchange ratio. The GulfTerra common units acquired for cash will be cancelled after completion of the merger.
El Paso's new plan
El Paso's debt-reduction program calls for as much as $3.9 billion of asset sales, the sale of restructured power contracts, the recovery of as much as $600 million in working capital, and the conversion of the company's 9% equity security units (about $575 million).
It was the first long-range plan unveiled by Foshee, who was named El Paso president and CEO earlier this year (OGJ, Aug. 4, 2003, p. 32).
The plan calls for El Paso's core businesses to be natural gas pipelines in the US and Mexico, oil and natural gas production operations in the US and Brazil, and a marketing and physical trading group focused primarily on gas and oil production.
El Paso Corp. said it will streamline its operations into a new corporate structure organized around regulated and unregulated businesses.
Assuming it meets its goals, El Paso's forecast 2006 net income of $500-725 million, or earnings of $0.75-1.10/ share. It also forecast cash flow from operations of $1.9-2.2 billion.
"El Paso expects to maintain significant liquidity through 2005, based upon operating cash flow generation, $2.1 billion of available cash and lines of credit on Nov. 30, and the completion of planned asset sales," a news release said.
The company identified potential sources of earnings volatility over the next several years.
In addition, El Paso said its restructuring activities might impact earnings through severance and restructuring costs, asset impairments, and gains and losses on asset sales.
Norsk Hydro-Wingas JV
Subject to European Union Competition Authority approval, HydroWingas Ltd. plans to start business activities in the spring of 2004.
The company, which will be based in Twickenham outside London, plans to supply gas directly to industrial end-users and redistributors.
HydroWingas will purchase its gas from the market, third parties, or from the owners.
Since domestic production of natural gas is decreasing, the UK is expected to become increasingly dependent on imports.
"Both Norsk Hydro and Wingas wish to establish a UK presence. Joining forces also means cost effectiveness and complementarity in competence and experience," said Hilde Myrberg, Norsk Hydro senior vice-president.
Naturgass Øst
Naturgass Øst plans to start its gas deliveries in 2006. Norwegian government officials early next year are expected to consider national policy on future gas use.
The discussion is part of a process to clarify the commercial basis for creating a supply chain of LNG terminals along the Norwegian coast.
Several companies with the same objectives as Naturgass Øst have been established in various coastal areas, Statoil said.
"Negotiations have already been initiated with potential industrial customers in Østfold," said Arvid Martinussen, Naturgass Øst president.
MarkWest
The Foss Lake gathering system includes 167 miles of gathering pipeline connected with 280 wells. The gathering system has 65 MMscfd of gas capacity with the ability to expand to 75 MMscfd.
The current system throughput is 58 MMscfd.
All gas gathered into the Foss Lake system is compressed and delivered to the Arapaho processing plant.
Yukos-Sibneft deal
In April, Yukos and Sibneft announced plans to merge into a $35 billion entity, YukosSibneft Oil Co., that would have been Russia's largest oil and gas company and would have ranked among the world's largest oil producers. Closure of the deal was slated for yearend (OGJ Online, Apr. 22, 2003).
Press reports said that the two firms were expected to completely reverse their merger proceedings, although no clear indication was given as to whether either company would compensate the other for the deal falling through.
Concerns over possible complications with the merger surfaced following the late-October arrest of Yukos CEO Mikhail Khodorkovsky by Russian police (OGJ Online, Oct. 28, 2003).
ChevronTexaco divestments
ChevronTexaco said its US properties up for sale are in 15 states and on the Outer Continental Shelf of the Gulf of Mexico. They represent more than 60% of ChevronTexaco's total US properties but only 5% of daily production.
Most of these properties are nonoperated joint ventures and royalty-only interests.
The Canadian assets being considered for divestment involve mature producing fields and midstream assets in western Canada that currently are producing 35,000 boed.
The decision will not affect strategically significant assets, the company said.
The divestment program and some office function consolidations are expected to be completed in 2004. An estimated 150-200 jobs will be eliminated as a result of the US portfolio decisions.
Personnel changes in Canada will be determined based on the disposition of specific western Canada producing and midstream assets, the company said.
EnCana's CBM plans
EnCana's properties are estimated to contain more than 2 tcf of CBM gas reserves.
During the next 5 years, EnCana expects to increase its natural gas production from coal seams to more than 200 MMcfd of gas.
"Typical of EnCana's other large resource plays, CBM lands could potentially yield several hundred MMcfd of long-life gas production," said Randy Eresman, EnCana's chief operating officer.
